The recent fuel price rise will add to India's inflation worries and tax cuts are seen negating its positive impact on the fiscal deficit

India raised diesel prices about 9 percent on Friday after months of delay and also cut customs duty on crude and petrol products and reduced excise duty on diesel, which will result in a total revenue loss to the government of about 490 billion rupees this year.
Economists continue to see The Reserve Bank of India (RBI) lifting its key lending rate further to tame high inflation.
Goldman Sachs increased its inflation forecast for 2011-12 to 8.6 percent from 8.1 percent previously after the fuel price rise, and expects the RBI to raise rates by 50 basis points over the next three months.
"We estimate the direct impact on headline inflation of the June 24 increase to be 0.6 percentage point (ppt), and an overall impact of 0.9 ppt for FY12," analysts Tushar Poddar and Vishal Vaibhaw wrote.
"We estimate the fiscal deficit in FY12 may increase a notch to 5.5 percent of GDP from our earlier estimate of 5.4 percent."
Goldman Sachs said that the tax cuts would negate the savings from lower subsidies to oil companies.
The wholesale price index, India's main inflation gauge, rose an annual 9.06 percent in May, above the median forecast for an 8.70 percent rise in a Reuters poll and the April figure of 8.66 percent.
Barclays Capital expects a 70 basis point immediate and direct impact of the fuel price rise on the headline inflation.
"Factoring in a subsequent indirect effect of the diesel price hike, we think the overall impact on the headline inflation rate could be 110 basis points in the next 3-4 months," Barclays analysts Siddhartha Sanyal and Kumar Rachapudi said in a note.
It maintained its expectation of another 25 basis point rate rise by the RBI in July-September and a pause thereafter.
Credit Suisse said the the fuel price rise was in line with its expectations and will add 0.6-0.7 percentage points to the wholesale price index.
"At this stage, we are not making any change either to our above consensus WPI forecast, which we expect to average 8 percent in 2011-12 (falling to 6 percent by March 2012), or our central government fiscal deficit projection of 5.4 percent of GDP," it said in a note.
The risks to both inflation and fiscal deficit are on the upside, it added.

Inflation fears put investors on the defensive

Inflationary pressures are building around the world, posing a dilemma for investors and prompting an increase in demand for bonds that offer protection against rising prices.
From the developed economies of the US and Europe to emerging markets in China, Brazil and beyond, rising food and energy prices have triggered increases in inflation over the past six months.
Markets are also pricing in further rises over the next few years with some warning that inflation could be the world’s next economic pressure point.
Alan Wilde, head of fixed-income and currency at Baring Asset Management, said: “Inflation is likely to be a theme this year. Prices are going up everywhere and this could lead to some problems in the world economy and markets.”
He added: “Inflationary pressures have prompted demand for index linked bonds as investors seek protection.”
Emerging markets face the biggest threat from inflation, according to some investors, as fund managers must decide whether the risks of some of these economies overheating outweighs their positive growth stories.
Inflation has risen sharply in the past year in the big emerging markets of China, Brazil, India and Indonesia as well as smaller economies such as Thailand, Malaysia, Vietnam, Venezuela and Argentina.
Brett Diment, head of emerging market debt at Aberdeen Asset Managers, warned investors that they need to be more selective over what emerging market assets they buy.
For example, bonds that are protected against inflation are considered a good bet, while conventional debt could be more risky in an inflationary environment. Emerging market currencies and equity markets could also offer good returns.
“We have had a very benign environment for the emerging markets for the past two years,” Mr Diment said. “The increasing inflationary pressures mean that it is now more of a challenge for investors.”
In Europe, inflation has almost certainly jumped because of the rise in food and energy prices, which were exacerbated by the fall in the euro at the end of last year.
In the US, the decision to launch a second round of quantitative easing has helped boost inflation.
The rise in inflation in the developed economies, which is still historically low, is seen as positive by many investors, particularly as only six months ago fears of deflation and a Japanese-style “lost decade” stalked the markets.
However, although the dangers of inflation are greater for emerging markets, many investors still consider such markets a better investment than those in the industrialised world as their growth potential outweighs the risks of rising prices.

Copyright The Financial Times Limited 2011. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.